Ask HN: I sold my company last month for $5m. What do I do with the money?
I'm a 20 year old guy who sold his company last month for $5m in cash. I really don't know what to do with the money or how to manage it. I never gave it a thought and now suddenly I have $5m. Hacker News, please help me out. Should I deposit the money? Buy stock? Or what the heck am I supposed to do with it? I am just a regular guy who spends around $3000 a month. I don't buy fancy stuff and now suddenly I have more money than I can ever spend.
182 comments
[ 5.0 ms ] story [ 243 ms ] thread2. $5m is enough to hire a professional to help you invest it.
A good place to start learning more about money might be the Personal Finance section of the Personal MBA reading list. See http://personalmba.com/best-business-books/
I've heard Gold is always a good investment, but I have no idea about that to be honest.
Make a depense estimation,kind of budget for the rest of your life.
##Here is how I'll make it:
1-Fix cost: House , Cars (estimate to 4 during my life)
2-varable Cost: wife , kids , kids college , virtual salary (let's say, I'll pay myself $5000 a month * estimate lifetime, just to spend around)
3- Taxes.
--------------------
Invest some money starting from here.
Here is what I would personally suggest, having encountered a similar scenario once a long time ago...
Find a place to park about $4.9M in a CD, Money Market account, or similar ultra low risk location. Don't get too hung up on getting the absolute best interest rate, just find a place that will give you easy liquidity (ie: DON'T make a 5 year investment right now).
Then, buy and read the following books: "A Random Walk Guide to Investing" - Burton Malkiel "The Only Investment Guide You'll Ever Need" - Andrew Tobias
(and/or any equivalent titles that catch your interest).
Then once you have a good/better understanding of financial investments interview some financial advisors and talk to them in depth about how they plan to manage your assets. Ideally you're looking for something more along the lines of a "wealth manager" vs. a financial advisor.
Killing a year finding the right investment approach while your money makes even a very low percentage rate is, for a 20 year old, a better approach than rushing out and making possibly a bad investment that incurs a big loss, or has tax liabilities you don't fully understand.
In the shorter term, you should find a good local CPA-for-hire and make sure you understand any possible income tax issues. In some (many) cases, if you will owe a large income tax return you will need to pre-pay or make estimated payments. Not doing so can take a big bite out of your ass later (ref: portion above about keeping funds semi-liquid).
BTW, congrats on your success. Take it slow and don't be tempted to believe you know what you're doing or can repeat this easily (learned advice ;) ). You have much time and luxury to plan your next move, and no matter what anyone tells you, you are not missing out on the investment opportunity of a lifetime in the next 24 months and do not need to make any rash decisions.
At the same time, you should sort of off-handedly tell family and friends that you locked in to a great investment and in 5 years or so will be able to access some of the funds. This proactive approach is better than having to say no to all the outreaches for "help" and "personal investments" that tend to come with a large chunk o' cash.
Whenever these types of questions appear I find them a bit hard to believe. The anonymous OP suddenly has $5M in cash? There's just a un-cashed check for $5M hidden in the sock drawer? Where is the money now? As soon as you show up at a bank with more than $100K you're going to be swarmed with people suggesting various things to do with your money. Hasn't the OP already had to deal with all the tax and legal surrounding a transaction like this? He or she should be familiar with a flotilla of financial professionals by now.
That said, there's plenty of places you can invest in AAA securities that pay much more than 1%. Split across several of these the capital should be safe until he finds a better place for it.
The fact remains there are a lot of simple, understandable securities which the ratings companies are across and have a long history of payments to look back on. I'm talking about corporate bonds where you can assess the creditworthiness of the company, government (non-US) bonds of stable and credit-worthy nations that pay much more than 0-1%
http://www.google.com/finance?client=ob&q=NYSE:BRK.A
http://www.treasurydirect.gov/indiv/products/prod_tbills_gla...
If you tell a bank you have $5m to to put in CD's they'll wet their pants alright, but it won't be security they call. It'll be their boss to gloat. (Unless maybe you bring it in in $100's in a duffel bag.)
http://www.cdars.com/
Personally, I think you'd just be better off buying government bonds from your favourite world leaders.
The fact that the HN readership seems to be aggressive in the former case and conservative in the latter is not necessarily a contradiction (or, to be honest, even surprising).
Thus, we may be thinking of it in terms of "how can I use this money to invest such that I can live off of the interest for the rest of my life, getting the equivalent of a decent salary but without the actual work"? If I got millions of dollars, this would be the first thing I would be thinking about, not about how to risk it all just so I can be another greedy douchebag unhappy with their single-digit millions.
The "conservative advice" is intended to buy him time so he can figure out what he should do.
Note that startups aren't about seeking risk. They're about exploiting cases where the perceived risk is greater than the actual risk. The advice givers think that his perceived risk is currently lower than his actual risk. They're trying to reduce the latter.
Even Graham has said that for most people a low cost index fund is the way to go. Competing against a computerized/connected/inside information Wall Street is very hard and because of transaction costs (higher to the individual than the institution) winning stock trading strategies are non-trivial.
However, Claude Shannon (famous computer science guy) was a pretty good investor: http://en.wikipedia.org/wiki/Kelly_criterion
Fortune's Formula http://www.amazon.com/Fortunes-Formula-Scientific-Betting-Ca... details some of Shannon's methods and covers some other interesting stories like LTCM, Mathematician Edward O. Thorp's black jack schemes and later his creation of the one of the first "computerized" hedge fund.
I found this edition helpful in that regard: http://www.amazon.com/Intelligent-Investor-Definitive-Invest...
Each of Graham's chapters is followed by another chapter of interpretation/reflection on his advice in a modern context.
So if you get $5M you should be looking to sacrifice a year from your life? Doh!
I've come to the opinion that there really is no way around getting a little bit savvy about investing oneself. Until then, I would probably also stick to something fairly conservative. Or at least decide on a basic split into risky and less risky investments.
http://agorafinancial.com
They have about the most realistic view of the world around. (Read: matches my biases. ;-) Seriously, their founder, Bill Bonner (and his main side-kick, Addison Wiggin) have written a couple of NYT best-sellers that were prescient about the current and past crises.
I also like the fact that they mostly hire St. John's grads, people who've actually gotten something close to a real education.
Back a few years ago when I had money to invest ;-), I used a couple of their newsletters (Penny Stock Fortunes and another I forget right now) over the period of a year or so and (though "the plural of anecdote is not data") made about 40% on my medium-sized investments.
These guys are the real deal.
2. hire a pro to manage it
3. travel all aroudn the world (1 year is cool)
4. come to france and invest in our startup. ;)
You don't have a financial advisor? Well, I assume you have a lawyer, and I assume you have a banker-- ask them for recommendations. You might also ask the pros who were on your board of directors prior to the sale.
I have first-hand knowledge of several simple cash transactions for business sales like this in the $2M-$10M range.
Like what?
I know this probably doesn't do anything to convince you I'm not full of shit, so I apologize for not offering concrete details. If you stop and think about it though, there is a lot more private money out there moving hands than you might think.
If I had a windfall like that I'd keep it quiet too, or at least not directly associated with my online identity, so if I would ask for advise about it online I'd do it just like the OP did.
or a regular user who did not want to post under his/her regular username for privacy reasons.
I wouldn't assume any of these things. Did YOU have a lawyer or financial advisor when you were 20?
The OP reads as if it was basically a 1-man shop sale. If he sold a company for $5M that had a board of directors and all the typical formalities, it probably would have been VC or angel backed, and the terms of the deal for a $5M sale would have probably netted him $500K at best. Let's face it, almost any investor-backed equity event of $5M is pretty much a failure and returns little if anything to the management team.
So, I read this as a "guy in a basement" sort of scenario who managed to create some webapp, service, or widget pretty much solo and was wise enough to be able to flip it for a nice chunk of change.
I also happen to think he was smart for reaching out here to get broader advice. I've met TONS of financial advisors that can't manage funds for shit. Not to mention in the current market a lot of funds are down, and I'm sure he would have no trouble finding a bad financial planner or lawyer that would love the opportunity to manage the portfolio of someone naive in that regard.
It strains credulity to imagine that anyone, of any age, would be able to close such a deal without a lawyer or a banker being involved. (And believe me, when you show up at the bank with a $5M deposit, you get introduced to financial advisors, like, fast.)
Seriously: just the practical mechanics involved in the sale of a corporation requires a small team of professionals. No one hands a check for $5M to a "guy in a basement" without some due diligence, and that involves accountants, auditors, lawyers and bankers.
(In fact, not everyone has the luxury of parents with good finances, or parents with jobs, or parents at all.)
Pro-bono lawyers aren't going to be pro-bono for long when they figure out you can actually pay them. That doesn't really help his cause though.
The serious lack of any understanding with regards to how difficult a situation not having responsible parents that give you a serious leg up is betrays both your youth and your own upbringing.
I'm not attacking you, I'm just saying that it pays to remember that not everyone has all the options you do available to them. Certainly not to the extent that it means they would never see the benefit in asking HN for advice.
Generally, someone smart enough to build a $5 million company should be smart enough to manage his own money.
They are probably also capable of fixing their own car or doing their own plumbing or landscaping.
Sometimes you want to delegate tasks that you dont' want to do onto others.
> > Generally, someone smart enough to build a $5 million company should be smart enough to manage his own money.
is false.
There's nothing an half-rational person can't do that your garden variety financial advisor can. If you can build a business, then basic ETFs, mutual funds, and bonds are easy to understand, and if you want to move into individual investments or private funds... you should not be relying on a financial advisor for this. If you think otherwise, I have some stocks I'd like to recommend. And a shady commercial real estate deal that will net me a fat commission. And a bridge in Brooklyn.
Legend has it there exist good financial advisors--but you have to find them. "Delegating" this because you "don't want to do" this is entirely the wrong attitude. If you don't take responsibility for your money, it will go away. It's 5 million freaking dollars, probably the entire net worth of this person, and the fruit of his business which he built.
You have a major principle-agent problem with financial advisers, and that's why I suspect many are better off without, especially if they can find an investment column in a newspaper or something like that. Years ago I read a guy named "The Coffeehouse Investor," which helped me enormously, as did the books I recommended previously.
The best advice I would give is to be quiet about how much money has been made. Find a good CPA and wealth manager. Talk about long term strategies, be sure to look at tax issues up front. People will come looking for hand outs and investments, avoid those for the most part. Make sure you trust your advisors and fully understand the decisions you are making. Don't take specific advice from somewhere like HN, try to look at patterns that may emerge from that advice however. So far it seems like everyone is advocating a conservative approach.
Seriously just learn about it yourself. My favourite book is "The Richest Man In Babylon" and it a phrase similar to yours: Don't go to a plumber to get bricklaying advice, go to a bricklayer, so don't get advice about your money from someone who isn't rich himself.
Now if your financial advisor is rich, what is he doing working for you?
For us, 50K is enough to survive for at least three years, without requiring any kind of austerity. I certainly don't call that 'nothing.
Short term CD ladders (so you always have some money free if you need it but most of it is actively earning interest) seem like a good option as well.
Also, he may very well have agreed not to reveal the sales price of the company to 3rd parties, keeping it anonymous is skirting that line.
Don't turn your money over to a financial advisor, unless they are personally referred by someone with a lot more cash than you. Any advisor you can afford is no good to you because you probably have more cash than them. By all means take advice, but don't blindly follow it and don't turn over control of your cash.
Learn a specific part of the real estate business that attracts you, and steer clear of single family residence homes. With that sort of cash you should be in multiple dwelling properties, or commercial retail, industrial or office buildings. The real estate market is dead and dying a bit more, so in the next couple of years that plum bargain is going to turn up, and you can be johnny on the spot, if you have done the study and learnt what is what. One good commercial property investment and you and your future family could be set for life with a healthy tax advantaged income and growing asset base.
With the stock market, I see a lot of advice here to approach the market, I would do so with a very limited amount of cash, certainly less than $50,000. If you lose that consider it a quality education on the perils of the market.
Learning to be an investor is like any other field and just because you win big in business doesn't make you an automatic whiz at investing. Capital protection is now your number 1 priority.
Oh, and if you're single, don't tell prospective girlfriends about it. You want to know which ones like you for who you are, not your bank account.
I read an article on HN the other day about signing a contract with a third party entity, that states if you do not sign a prenuptial agreement, when you meet that prospective mate and decide to get hitched. Then said third party is entitled to half of your current net worth.
It is a poison pill, but one that they have to swallow. If you are not married, I would consult a lawyer about setting up that contract with a parent, sibling, best friend or me. The good part is it gives you an out without being awkward when the time comes, you can use the:
"My parents begged me to do it, because they where concerned about my partying with rock stars, the coke and running with the wrong kind of girls, and at the time I had not met my one true love, It's no big deal because we are going to be together forever, right?".
In all seriousness, congratulations. Seems like a good problem to have. I don't have a lot of advice, but if it were me, I would avoid trying to leverage the money too much. It might be a good way to turn $5MM into $50MM, but it's also the best way to turn it into $0.
The utility of a lot of extra money is likely to be low for you.
Put 30% in VTI - the Vanguard Total Market Index (basically all US stocks).
Put 30% in EFA - the Europe, Australasia, Far East first world country index.
Put 10% in RWR - an index of U.S. real estate.
Put 10% in RWX - an index of international real estate.
Put 15% in Treasury Inflation Protected Securities.
Leave 5% highly liquid.
Minor variations on this are fine. The key is invest in broad market indices, diversified among stocks and real estate, domestic and internationally, with a bit of cash set aside for rainy days. Any other strategy involves speculation (trying to be smarter than the market), and unless you think you really know what you're doing, you shouldn't speculate.
Recently there was some discussion about simplest possible portfolio on Dilbert blog: http://www.dilbert.com/blog/entry/worlds_simplest_portfolio/
You're young. Stick it in a money market account or something safe for a few months until you can get some real financial advice.
Personally, if I had $5 million I would probably leave it in money market and safe CDs until this period of global deflation and low interest rates is past us. I would wait until the inevitable inflation that is coming in a few years, and when interest rates are over 10% (hopefully), put a couple million in fixed annuities that will pay out monthly for the rest of my life, put 1-2 million in safer investments, and invest the other million in risky stocks with a high potential payout.
That way, I have guaranteed income for the rest of my life from the annuities, enough to live off of, and can hopefully see some better returns from the rest of the money. A good financial advisor can give you a better strategy.
But otherwise, investing in a pure cash portfolio is super-exposed to inflationary risk, and very low-growth.
In other words, a financial trade isn't a bet on your insight. It's a bet that your insight is sharper than the person on the other side of the trade.
There is a very likely chance that the first four options could all suffer losses in the immediate future, which is a needless risk.
I think staying out of the market until the current mess passes would be better rather than risk your initial investment by investing right this second.
keep a few years of spending money in cash You can split the risk based on your risk appetite 30% muni 50% treasury 10% stock
I would recommend more stocks at this point as we've had a market reversal recently. Also many stocks pay dividends much higher than treasuries and have the chance for capital appreciation.
If you want to land lord you can buy a building 1 million cash could get you a nice rental property...depending on the area
Diversify.....!!!!!!
I think these are important questions that you need to consider first. They will shape your investment strategy.
Take 10% of the money and put it into an easily accessible account you can use day-to-day. The other 90% put in a high-interest account and forget about for 12 months.
You can then use that 12-month period to decide what you want to do, but safe in the knowledge, in this case, you have enough money readily available to live and not worry about bills. You also have the bonus of a nice lot of interest added to your sum next year.
Say you buy 2 houses for $350k(random example for bloomington, In, can be much less.
I'd buy these in cash, which goes against everything you will ever read about total leverage and all of that, but then you can buy two more houses and put 20% down other two as collateral if they require it(they shouldn't), so you have 4 houses at the cost of 2.4 houses, which means you will be collecting a lot of rent. Since you have 4 houses you are depreciating as they are investments, that income will probably come in right around being tax-free as long as it is something around $1.2m in property so like $45k/ish a year income, if not more.
Then you buy up a few houses with this income, maybe you can get 3 houses in a row, then maybe you can build a row of townhouses you can rent(cheaper to maintain)
So that's just an idea, arguably better than letting it sit in an account, and you are buying something that has a relatively high demand, student housing.
Other housing also works, but students are better to deal with.
So you're making a bunch of money off of 1.2m of your 5m and if you ever have to sell or get money out of those houses you could borrow against them or you could sell them outright.
Also check out tax free muni bonds.
not proofread
Don't jump into landlording without having experience with contracting and home repair, or at least without a family member that does. A single rental is fine, but managing five? Huge time sink.
Also, any clues on what the name of your company is?
At 21 I came into a pretty useful 6 figure sum, essentially through good luck and timing. At that age you're used to living on a shoe string (especially if a student like I was) and so that can seem an extraordinary amount of money. I'd say it's a pretty scary age to become affluent, you may have grown up in the last couple of years since leaving school but it hardly counts as worldly.
I spent about £30,000 within a couple of months before I stopped and thought about it properly. So the first piece of advice is: avoid too much temptation! That can be hard and I still have trouble controlling impulse purchases (Amazon Prime is the worst invention ever :P my book buying budget is still about £300/month, and I've actually worked to get that down).
As to what to do with the money; while plenty of HNers will be able to give you advice (hopefully from experience!) the other posters are right - you need to talk to a financial advisor.
My take? Put it somewhere safe and take the interest - then just ignore it. If you want to take the $5M and do something with it (i.e. start a firm, pursue your dream) then do that. Otherwise I advise ignoring it and just carrying on with your career how you want - albeit slightly more comfortable/financially secure. In 5 years when you want a nice house the money is there and ready. etc etc.
Certainly having money is going to change you; but I'd suggest it needn't change your life path too much. Don't let it derail what you want to do :) allow it to facilitate those things!
This is pretty much what I have done and it sees to have worked. YMMV.
Now, to business.. If you sold company stock, and live in the states, you now owe about $1m in taxes, or a little less depending on what state you live in.
Your very first job is to sit down with an accountant and get your 2010 taxes estimated. Then set aside the money for this. Seriously, do it today. Then lock in your head "I sold my company for $4m." It will help you in the future days to remember that.
If it was an asset sale, you got f-ed, and now owe a lot of tax money. Live and learn.
Next, let's talk about 'more money than I can ever spend'. If you keep your current spending rates, and you keep your money in a completely 'safe' vehicle that exactly matches inflation, you have about 94 years of spending ahead of you at your current rates, and at 15% cap gains tax on the 'earnings'.
It is nearly psychologically impossible for a newly minted 20-something millionaire to keep at their current level of spending. Since you do not already have a plan for this money, I would say that it is 100% likely you are not the sort who can go about his business without some change in lifestyle. So I would suggest that you expect either to keep working or get good at investing.
Along with the books recommended here, I would strongly recommend you pick up one called "How To Retire Early and Live Well on Less than a Million Dollars." It's written by a financial writer who decided to do what the title says in the 1970s. He talks through a number of items and considerations that financial advisors will not think about. Simple example: what's the proper amount of real estate leverage for someone who needs some income, and wants to be able to hold on to the building in a real estate crash? This is not typically discussed in most investing books.
It is not unreasonable, based on all this, to put almost all of this money into a one year, low-risk, locked-away investment just to give yourself time to think, plan,and get on with a new part of your life.
Now, if you built this company up, and are now unemployed, expect to be depressed. You should consider (along with some celebrating) doing some fun things (I like to travel), and also learning some new skills.
You will need some new friends, because your old ones will all still be working,and won't be able to hang out most of the time. You might want to find a new hobby, or pick up an old one.
Finally, enjoy! Sounds like a great experience.